TY - JOUR
AU - Gompers,Paul
AU - Mukharlyamov,Vladimir
AU - Xuan,Yuhai
TI - The Cost of Friendship
JF - National Bureau of Economic Research Working Paper Series
VL - No. 18141
PY - 2012
Y2 - June 2012
DO - 10.3386/w18141
UR - http://www.nber.org/papers/w18141
L1 - http://www.nber.org/papers/w18141.pdf
N1 - Author contact info:
Paul Gompers
Harvard Business School
Baker Library 263
Soldiers Field
Boston, MA 02163
Tel: 617/495-6297
Fax: 617/496-8443
E-Mail: pgompers@hbs.edu
Vladimir Mukharlyamov
Harvard University
Department of Economics
Littauer Center
Cambridge, MA 02138
E-Mail: mukharly@fas.harvard.edu
Yuhai Xuan
Department of Finance
College of Business
340 Wohlers Hall, MC-706
1206 South Sixth Street
Champaign, IL 61820
Tel: 217-300-3689
E-Mail: yhxuan@illinois.edu
AB - This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people's desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based "birds-of-a-feather-flock-together" effects in collaboration can be costly.
ER -